Is it fake? Using potentially low quality suppliers as back-up when genuine suppliers are unavailable

Supply scarcity of authentic products may force businesses to turn to alternative suppliers potentially carrying counterfeit goods. Detecting these products prior to sale has proven challenging, so when they are procured they may end up in the consumer market. When protection methods, such as full inspection, are operationally or financially unfeasible, inventory management becomes critical. In this paper, we explore the use of alternative back-up suppliers, who might be carrying counterfeit goods in their inventories, when the main trusted source is unavailable. In particular, we prove the optimality of state-dependent order-up-to level replenishment policies under different liability schemes for an intermediary with access to (i) one genuine supplier subject to random disruption and (ii) an alternative supplier offering the same good but of dubious quality. When the intermediary is fully liable for products resold to third parties at the end of the planning horizon, we show that the problem is equivalent to a multi-period inventory control problem with random demand and procurement cost. Optimal cost for the full liability case serves as an upper bound for the case where the intermediary is not held liable for the salvaged goods (limited liability). We perform sensitivity analyses of the optimal order quantities and costs to identify critical problem parameters and shed light on the incentives of supply chain members to combat counterfeit.